iipc - decision oriented... · 2017-12-27 · net of relevant transaction costs return calculation...
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Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 1IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
IIPCIllmer
Investment Performance
Consulting AG
Best practice investment reporting- from an asset owner perspective
Date: 06.12.2017
Produced by: Dr. Stefan J. Illmer
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 2IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Starting point (1/4)
... as we also have some needs …
Why are you always discussing best
practices from an asset manager
perspective ? …
Current industry standards focus
mainly on asset managers !
Service providerAsset owner
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 3IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Starting point (2/4)
... but not often for asset owner's
(internal) reporting.
Industry standards are good for
comparisons, …
Industry standards requiring
standard methods and reports
are a perfect argument
to provide standard and not
asset owner specific
solutions!
Service providerAsset owner
Industry standards are just GREAT!
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 4IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Starting point (3/4)
Asset owner driven
investment reporting
This type of investment reporting
is designed by the asset owner –
considering the asset owner’s
specific circumstances.
The objective is to provide
relevant management information
for internal decision makers.
Asset owner have a big problem
getting the relevant management
information and tailor-made reports
that reflect best practice.
Service provider driven
investment reporting
This type of investment reporting
is mainly designed by the service
provider – maybe considering a
kind of standard asset owner.
The objective is to make the
service provider look better or to
provide a reasonable report with
low costs and with no risk.
Service provider have little incentive to
reflect asset owner's needs regarding tailor-
made information and reports, and therefore
provide best (standard) practice.
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 5IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Starting point (4/4)
We need an industry standard that
or service provider who
support us to get tailor-made information
and reports that reflect our needs !
But why is the industry standard
report not sufficient ?
Service providerAsset owner
Let's have a closer look
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 6IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Examples for opposites – standard versus tailor-made (1a/3)
Return measurement – the use of the time weighted rate of return:
▪ TWR is useful if evaluating performance of an asset manager who has no
discretion over cash flows => specific case.
▪ TWR is in focus because of its characteristic to neutralize the effect of
external cash flows and therefore to allow comparisons.
▪ Industry standards require mainly TWR for marketing performance track
records to asset owners => specific case.
▪ Industry standards provide indirectly reasoning to not offer MWR
calculations and analytics => standard.
▪ Propaganda around TWR led to less and lesser use of MWR.
Result: Asset owner often use a TWR for purposes which TWR is not designed
for.
Software and service provider often do not provide a proper MWR
calculation and analytics.
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 7IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Examples for opposites – standard versus tailor-made (1b/3)
Return measurement – the use of the time weighted rate of return:
Absolute profit: EUR -100
TWR: 10%
MWR: -10%
=> The question is not what measure to use – the question is: what is the
appropriate measure for the specific purpose in mind.
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 8IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Examples for opposites – standard versus tailor-made (2a/3)
Return measurement – the use of the gross return:
▪ Gross return is useful if evaluating performance of an asset manager who
has no discretion over the management fees => specific case.
▪ Gross return is in focus because of its characteristic to neutralize the
company specific management fees and therefore to allow comparisons.
▪ Industry standards require mainly gross return for marketing performance
track records to asset owners => specific case.
▪ Industry standards provide indirectly reasoning to offer by default gross
return calculations => standard.
▪ This led to less and lesser use of net returns - except where it is required
by laws and regulations.
Result: Asset owner often use a gross return for purposes which a gross return
is not designed for.
Software and service provider often do not provide a proper and flexible
net of fee calculation and analytics.
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 9IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Examples for opposites – standard versus tailor-made (2b/3)
Return measurement – the use of the gross return :
Gross TWR: 10%
Net TWR: 9%
=> The question is not what measure to use, the question is: what is the
appropriate measure for the specific purpose in mind.
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 10IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Examples for opposites – standard versus tailor-made (3a/3)
Return measurement – the use of a return net of transaction costs:
▪ Return net of transaction costs is useful if evaluating net performance of
an asset manager without asset owner driven transactions => specific
case.
▪ Return net of transaction costs is in focus because of its characteristic to
account for management activity and therefore to allow comparisons.
▪ Industry standards require mainly a return net of transaction costs for
marketing performance track records to asset owners => specific case.
▪ Industry standards provide indirectly reasoning to offer by default return
calculations net of all transaction costs => standard.
▪ This led to less and lesser correction for return impacts caused by asset
owners – for example if investing in illiquid asset classes.
Result: Asset owner often interpret returns in a way they were not designed for.
Software and service provider often do not provide a proper and flexible
net of relevant transaction costs return calculation and analytics.
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 11IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Examples for opposites – standard versus tailor-made (3b/3)
Return measurement – the use of a return net of transaction costs:
Gross TWR: 10%
Gross TWR gross of asset owner
driven transaction costs: 11%
=> The question is not what measure to use, the question is: what is the
appropriate measure for the specific purpose in mind.
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 12IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Comprehensive return measurement (1/8)
Type of profit and costs / taxes Profit / costs
Net AO profit according to accounting (before accounting related corrections like e.g. IT write-downs) 4'000
Non-asset management costs and all non-asset management taxes 40
Net AM profit 4'040
External asset management costs and taxes 314
Management fees 200
Estimated TER-costs 100
Custody fees 10
Non-reclaimable withholding taxes and other taxes 4
Internal asset management costs and taxes 32
Internal asset management costs 30
Other internal asset management costs (e.g. reporting, risk analysis) 2
Transaction costs caused by the board of directors 10
Gross AO and AM profit 4'396
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 13IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Comprehensive return measurement (2/8)
What is my return!
Depending on the handling of
fees – it is TWR net 4.040% or
TWR gross 4.354%?
Service providerAsset owner
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 14IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Comprehensive return measurement (3/8)
We not just need one or two types
of return.
Different questions need different
measures - for a proper answer !
But people always say:
TWR is the solution?
Service providerAsset owner
Let's have a closer look
In some cases but not in all.
... and there is not just one type of TWR.
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 15IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Comprehensive return measurement (4/8)
Type of return Underlying profit and return (with total assets of 100'000 and no external cash flows)
Net AO return => 4'000 => 4.000%
Net AM return => 4'000 + 40 = 4'040 => 4.040%
Gross AM return 3 => 4'040 + 314 = 4'354 => 4.354%
Gross AM return 2 => 4'354 + 32 = 4'386 => 4.386%
Gross AO / AM return 1 => 4'386 + 10 = 4'396 => 4.396%
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 16IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Comprehensive return measurement (5/8)
That is great if we want to evaluate the
performance of the whole
organization.
Asset owner
Let's have a closer look
But what if looking at the individual
portfolio manager?
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 17IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Comprehensive return measurement (6/8)
Type of profit and costs / taxes Profit / costs
Net AM profit 4'040
Net AM profit (internal account 1) 1'040
Account specific internal and external asset management costs and taxes 20
AO / AM driven transaction costs (due to rebalancing and changes in the strategy) 10
Gross AM profit (internal account 1) 1'070
Net AM profit (external account 2) 3'000
Account specific internal and external asset management costs and taxes 326
AO / AM driven transaction costs (due to rebalancing and changes in the strategy) 40
Gross AM profit (external account 2) 3'366
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 18IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Comprehensive return measurement (7/8)
For our internal investment reporting
we need more than one type of return!
I was not aware of this?
Service providerAsset owner
Let's have a closer look
Returns / return contributions YTD returnYTD return contribution to
total assets
Gross TWR for total assets + 4.396% + 4.396%
Net TWR for total assets + 4.040% + 4.040%
Net TWR for bonds (50%) + 2.080% + 1.040%
Gross TWR for account bonds + 2.140%
... ...
Net TWR for equities (50%) + 6.000% + 3.000%
Gross TWR for account equities + 6.732%
... ...
Additional information:
Gross MWR for total assets + 4.896%
Net MWR for total assets + 4.540%
Comprehensive return measurement (8/8)=> a bit more concrete if evaluating the asset management.
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 20IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Other examples for opposites – standard versus tailor-made
▪ Risk measures.
▪ Risk models.
▪ Asset classifications.
▪ Pricing logics.
▪ Asset characteristics.
▪ Definition of benchmarks.
▪ Calculation of benchmark returns.
▪ Input data for calculating measures and running analytics.
▪ ...
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 21IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Conclusions (1/2)
▪ Best practice investment reporting is not identical to current industry
standards for presenting information to prospective clients or marketing
performance track records to asset owners.
▪ Best practice investment reporting is not about best (standard) practices for
measuring performance figures or presenting information.
▪ Best practice investment reporting is not about ONE FITS ALL.
But ...
▪ Best practice investment reporting is about appropriate information for the
specific purpose in mind.
▪ Best practice investment reporting is about communication between the
preparer and the user about the necessary and appropriate information.
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 22IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Conclusions (2/2)
▪ The GIPS Standards are not the solution for this kind of issue, because they
are designed:
▪ for a specific kind of investment reporting (to market performance track
records),
▪ for a specific need (to compare performance track records) and
▪ for a specific purpose or use (to evaluate and select asset managers).
▪ One way to better address the needs of asset owners regarding investment
reporting is considering and implementing the "Principles for Investment
Reporting" and the "Guidance to Effective Investment Reporting" – both
available on the CFA Institute's webpage.
Let's have a closer look
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 23IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Principles for investment reporting:
1. Communication occurs between the
preparer and the user as to the purpose
of and need for investment reporting.
2. Control processes, policies, and
procedures are documented and
followed.
3. Client preferences are reflected in the
investment report.
4. Clear and transparent presentation of
investment risks and results.
5. Comprehensive fee disclosure.
=> leads to effective investment reporting.
Steps towards best practice investment reporting (1/4)
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 24IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Effective investment reporting reflects
certain qualities (like the
communication process), which are
discussed in the Principles for
Investment Reporting.
Recommendations that support
the qualities which, if
implemented, lead to Effective
Investment Reporting.
Steps towards best practice investment reporting (2/4)
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 25IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
EIR addresses the need for flexible guidance that allows for the production of
investment reports that incorporate:
a. the needs and requirements of the user,
b. the capability of the preparer,
c. the availability of sufficient information to understand the investments made,
the results achieved, the risks taken, and the associated costs.
Client base(s) Recommendations
Company specific implementation
Investment reports
Steps towards best practice investment reporting (3/4)
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 26IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Results of implementing EIR
EIR statements
EIR report
EIR document
EIR assurance
EIR recommends that preparers engage an
independent third party to provide assurance
concerning their ability.
The exact scope and content of the assurance can
be determined by the preparer and the assurance
provider, but it should result in an assurance that the
processes followed by the preparer are sufficient to
support the use of the statements and the production
of reports in accordance with EIR.
EIR recommends that preparers maintain an EIR
document, which can be divided into two sections:
a. a section that contains the documentation that is
generic to all members of the defined client base
and
b. a section that contains the user-specific
requirements that have been determined and
documented following the discussion between the
preparer and the user.
Steps towards best practice investment reporting (4/4)
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 27IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Discussion
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 28IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Discussion
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 29IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Best practice investment reporting
Thank you very much!
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 30IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Contact details and disclaimer
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 31IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Illmer Investment Performance Consulting AG
Weinbergstrasse 28
CH - 8200 Schaffhausen
Switzerland
www.iipc-ag.com
Dr. Stefan Joachim Illmer
Tel. +41 / 79 / 962 20 37
Email: stefan.illmer@iipc-ag.com
Contact details
Produced by: Dr. Stefan J. IllmerDate: 06.12.2017 - Slide 32IIPC
Illmer
Investment Performance
Consulting AG Success through excellence!
Disclaimer
This document was produced by Illmer Investment Performance Consulting AG (hereafter "IIPC-
AG") with the greatest of care and to the best of its knowledge and belief. However, IIPC-AG
provides no guarantee with regard to its content and completeness and does not accept any liability
for losses which might arise from making use of this information. This document is provided for
information purposes only and is for the exclusive use of the recipient. It does not constitute an offer
or a recommendation to buy or sell financial instruments or banking services.
It is expressly not intended for persons who, due to their nationality or place of residence, are not
permitted access to such information under local law.
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